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Saturday, January 03, 2009

Fareed Zakaria - Writing the Rules for a New World

This is a very good article posted at Newsweek at the end of last year (Wednesday). A lot people dislike Zakaria for his globalist (some might say worldcentric) perspective, but I think he is one of the few people actually thinking big enough to grasp the complexity of the problems facing us.

Writing the Rules for a New World

Today's problems ignore national boundaries. The world needs smart management that does the same.

If you want to know what the post-American world will look like, just reread the coverage of the November G20 summit in Washington, D.C. First, there was the event itself. Every prior financial crisis had been handled by the IMF, the World Bank or the G7 (and, later, the G8). But this time, the big boys realized they couldn't tackle the problems alone and had to bring in world's top emerging markets too. For an effective response in a highly connected global economy, all the world's major players needed to participate. To supply cash, countries like China and Saudi Arabia were crucial. As for legitimacy, the old Western clubs were archaic, relics of a bygone world and could no longer provide it on their own.

Of course, not everything has changed. The meeting was still held in Washington, and President George W. Bush got to play the major role in setting the agenda. America has vital relations with key countries like China, Japan and Saudi Arabia, as well as good ties to old allies like Britain, France and Germany. And it seemed entirely possible that this larger and more representative group of nations could actually do some of the policy coordination needed to begin to solve the crisis. So it's a new world, but not necessarily one from which America has been ousted, nor one where common actions are impossible.

Historians will probably look back on the meltdown and see it as one largely caused by success. I realize it seems odd to say that of events characterized by panic, a credit crunch, slowing growth and falling stock markets. But consider the conditions that created this state of affairs. Over the past two decades, the world had enjoyed political stability, low inflation and a massive expansion of the global economy by almost 3 billion people. Countries around the planet grew at unheard-of levels—124 of them expanded at 4 percent or more in 2006 and 2007. Wars, civil conflicts and terrorism caused less political turmoil than they had in decades—or, by some measures, in centuries.

All this produced a new set of problems. As some countries grew in strength and resources they became more assertive and nationalistic. The emergence of Iran, Venezuela and a revived Russia is in good measure a product of the price of petroleum. So is Islamic jihad. Fueled by vast amounts of money, Wahhabi ideas found their way into almost all Muslim countries, shifting the tone of Islam everywhere and giving resources to radicalized young men.

In the world of economics, prosperity and low inflation unleashed two massive forces. The first was cheap credit, and the second, vast new pools of capital. Surplus savings piled up in the emerging economies of Asia (and then in the oil-producing countries of the Middle East) on a scale never before seen in history. Add to these two new forces two old ones—greed and stupidity—and you begin to understand how it all came apart.

At one level, the problem is that the United States and some other Western economies consumed too much—much more than they produced—and made up the difference by borrowing. But if America overspent, Asia oversaved. All those savings—some $10 trillion—had to go somewhere, and for two decades most of it was funneled back into the United States, which was seen, with some justification, as the safest and best place to invest. This led to easy credit and multiple bubbles in the United States—in technology stocks, bonds, real estate.

As bad as it looks, the current financial crisis will end. I don't know when or how, but the combination of government interventions will eventually work. Why do I say this? Because governments are more powerful than markets. They can close markets down, nationalize firms and write new rules. And Washington has one other, unique power: it can print money.